Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.



Published on

  • Be the first to comment

  • Be the first to like this


  1. 1. Innovest Rating Methodology ICC Moscow - Sept. 2007 Marc Brammer, Director of Research, Europe Innovest Strategic Value Advisors
  2. 2. About Innovest <ul><li>Background </li></ul><ul><li>Specialist investment research provider, focusing on non-traditional drivers of investment risk and returns, including companies’ performance on environmental, social and governance issues </li></ul><ul><li>Companies’ performance on these factors provides a robust proxy for their overall management quality and long-term financial performance </li></ul><ul><li>Founded in 1995 and has since grown to over 40 professionals </li></ul><ul><li>Offices in London, New York, Toronto, Paris and Madrid; clients in 20 countries </li></ul><ul><li>Chairman was former Chief Investment Officer of TIAA-CREF, one of the largest pension funds in North America </li></ul><ul><li>Largest outside investor is ABP (Netherlands), one of the top 3 largest pension funds in the world </li></ul><ul><li>Serves both mainstream and SRI investment clients </li></ul><ul><li>$1.1 billion under structured sub-advisory mandates and $4 billion in SRI AUMs using Innovest’s research. Clients with a collective asset base of over $7 trillion. </li></ul>
  3. 3. How do you invest “long term” when everything is changing so fast? <ul><li>Current Sustainability threats – resource depletion, climate change, over-population, extinctions – are long term problems needing long term solutions. Quarterly earnings prevent companies from developing long-term business strategies to these challenges. However, the old paradigm of “Growth” won’t work anymore in a resource constrained environment. </li></ul><ul><li>Quarterly Earnings are a reality of the market that must be addressed by investment advisors that focus on the sustainability or “ESG” question. </li></ul><ul><ul><li>Make the connection between sustainability issues and short term events. </li></ul></ul><ul><ul><li>Examples – fuel & resource prices, env. regulations, labor strikes, etc. </li></ul></ul>Challenges to the Long-Term – Challenges to the Short Term Therefore, investors need a tool that addresses the need for a long term investment strategy while incorporating the complexity of the emerging sustainability challenges.
  4. 4. New Conditions – the “Mother” of all Investment Risks <ul><li>Carbon stabilization at double pre-industrial CO2 levels would require reductions of 7 gigatons (7 billion tons). </li></ul><ul><li>700 nuclear plants to replace fossil fuel plants. </li></ul><ul><li>Increase solar panel use by a factor of 700. </li></ul><ul><li>Stop all deforestation and double present efforts at reforestation. </li></ul><ul><li>Four additional large scale reallocations of capital & infrastructure. </li></ul><ul><li>Result: Avoid “worst case scenario” </li></ul><ul><li>but still undergo significant climate change </li></ul><ul><li>and disruptions. </li></ul>
  5. 5. New Conditions – the “Mother” of all Investment Risks Since 1750, the atmospheric concentration of CO2 has increased by about 32% (from about 280 to 376 parts per million in 2003), primarily due to the combustion of fossil fuels and land use changes. Approximately 60% of that increase (60 parts per million) has taken place since 1959.
  6. 6. Additional Pressures: High Oil Prices
  7. 7. New Conditions: Human Population Growth
  8. 8. New Conditions - Earth’s “Carrying Capacity” Source: WWF’s Living Planet Report 2004
  9. 9. 0 100 200 300 400 500 0 10 20 30 40 50 60 70 80 90 100 110 120 Market Capitalization in US$ Billions Plant, Property & Equipment in US$ Billions, Top 100 market cap. firms (‘81, ‘91, ’01) Over the past 20 years, companies’ stock market performance has come de- coupled from the tangible asset base. Current Accounting Doesn’t Capture True Information about the Value of the Company… Source: Ernst & Young Center for Business Innovation 1981 1991 2001 AT&T AIG General Electric Cisco SBC Wal-Mart Exxon-Mobile Microsoft Daimler Chrysler Nippon BP Amoco IBM Intel Deutsche Telekom Pfizer 1981 1991 2001
  10. 10. Assumes $30/Ton Carbon Price and 10% Emissions Reduction Target Potential Carbon Liabilities as a % of Market Capitalization (a/o 7/05) Electric Utilities The Upside – Avoid Risk
  11. 11. The Upside – Seize Profit Opportunities
  12. 12. <ul><li>Four Key Intangible Value Drivers </li></ul>A New Approach The “Iceberg” balance sheet Financial Capital 30% <ul><li>Sustainable Governance </li></ul><ul><li>Strategy </li></ul><ul><li>Capability/ Adaptability </li></ul><ul><li>Traditional governance practices </li></ul><ul><li>Stakeholder Capital </li></ul><ul><li>Regulators & Policymakers </li></ul><ul><li>Local communities </li></ul><ul><li>NGOs </li></ul><ul><li>Customer relationships </li></ul><ul><li>Alliance partners </li></ul><ul><li>Supply chain </li></ul><ul><li>Social benefits of products & services </li></ul><ul><li>Human Capital </li></ul><ul><li>Recruitment retention strategies </li></ul><ul><li>Employee motivation </li></ul><ul><li>Labor relations </li></ul><ul><li>Innovation capacity </li></ul><ul><li>Knowledge Development & Dissemination </li></ul><ul><li>Health & Safety </li></ul><ul><li>Progressive workplace practices </li></ul><ul><li>Eco-Value </li></ul><ul><li>Quality of environmental management </li></ul><ul><li>Environmental risks & Eco-efficiency </li></ul><ul><li>Strategic profit opportunities </li></ul>Intangible Capital 70%
  13. 13. Intangible Value Assessment 100+ factors, grouped into 4 key categories: IVA ™ Human Capital Recruitment/Retention strategies Employee Motivation Innovation Capacity Knowledge Dev’t & Dissemination Health & Safety Progressive workplace practices Stakeholder Capital Supply Chain Labour relations Emerging Markets Partnerships/alliances Customer relationships Regulators and Policymakers Local communities & NGOs Environmental Performance Environmental Strategy /Management Risk Factors Product/Materials Intensity Eco-efficiency Initiatives Strategic Profit Opportunities Sustainable Governance Strategic Scanning Capability Agility / Adaptability Performance indicators/monitoring/ reporting International ‘best practice’ Products & Services
  14. 14. How We Work – Innovest’s Research Process 6 4 3 2 Collection of Data From Companies - Annual Reports, 10Ks, Sustainability Reports, websites From Government – EPA data, DOE data, other gov’t data From NGOs, industry associations, “think tanks”, other research organizations, and many other sources In-Depth Sector Analysis Analyst reviews general information on the sector which is being analyzed Analyst assesses competitive dynamics, major risks and opportunities of the sector, which will determine the focus of the analysis Preliminary Work on Rating Matrix Analyst fills in data and scores each of 100+ factors in the rating matrix for each company in a sector “ Reality Check” Analyst defends final ratings in front of Directors or MD of Research. Process analogous to a presentation to an Investment Committee at an asset manager. 1 Company Interview Analyst interviews each company, honing in on questions resulting from preliminary analysis 5 Completion of Rating Matrix Analyst fills in data and scores each of 100+ factors in the rating matrix for each company in a sector. Industry-specific factor weightings determined by empirical stock market research
  15. 15. Auto Sector Ratings ‘07 CCC CCC CCC Denway Motors 203-HK B CCC CCC Bajaj Auto BAJAJAUTO-BY BB CCC B Maruti Udyog MARUTI-BY BB CCC B Ford F BBB CCC BB Harley-Davidson HDI BBB B BB Porsche POR3-FF BBB BB BBB General Motors GM BBB BB BBB Mitsubishi Motors 7211-TO BB BBB BBB Fiat F-MI BBB BBB BBB Hyundai HMC-SE BBB BB BBB Mazda Motor 7261-TO A BB BBB DaimlerChrysler DCX-FF BB A BBB Suzuki 7269-TO BBB A A Peugeot UG-FR BBB BBB A Fuji Heavy Industries 7270-TO A BBB A Nissan 7201-TO BBB A A Isuzu 7202-TO A BBB A BMW BMW-FF A A AA Yamaha 7272-TO AA AA AA Volkswagen AG VOW-FF AAA AA AAA Renault RNO-FR A AAA AAA Honda 7267-TO AA AAA AAA Toyota 7203-TO Social Rating Environmental Rating Combined Rating Company Ticker
  16. 16. Chart of fuel economy standards in major markets
  17. 17. European fleet fuel economy performance
  18. 18. Who’s betting where on powertrains
  19. 19. Potential cost of CO2 emissions at €30/t emissions cost Calculations are based on the latest figures available for each company’s Scope 1&2 emissions set forth under the reporting guidelines of the GHG Protocol. Expected reduction cost is based on assumed 10% reduction requirement.
  20. 20. CO2 Emissions and potential CO2 emissions liability
  21. 21. Innovest Auto Ratings Performance
  22. 23. Three Year Live Simulation
  23. 24. <ul><li>Financial Institutions </li></ul><ul><li>ABN-AMRO </li></ul><ul><li>ABP Investments </li></ul><ul><li>Allianz Group </li></ul><ul><li>Barclays Global Investors </li></ul><ul><li>BNP Paribas </li></ul><ul><li>BP Pension </li></ul><ul><li>CalPERS </li></ul><ul><li>Credit Lyonnais </li></ul><ul><li>Daiwa Securities </li></ul><ul><li>Frontier Capital Management </li></ul><ul><li>Glenmede Trust </li></ul><ul><li>Goldman Sachs </li></ul><ul><li>Hermes (British Telecom Pension) </li></ul><ul><li>JPMorgan Chase </li></ul><ul><li>Lombard Odier & Cie </li></ul><ul><li>Mellon Equity </li></ul><ul><li>Neuberger Berman </li></ul><ul><li>Rockefeller & Co. </li></ul><ul><li>Schroders Investment Management </li></ul><ul><li>Societe Generale </li></ul><ul><li>Swiss RE Asset Management </li></ul><ul><li>State Street Global Advisors </li></ul><ul><li>T. Rowe Price </li></ul><ul><li>Threadneedle (American Express) </li></ul><ul><li>UBS Investment Bank </li></ul><ul><li>Wellington Management </li></ul>Partial Client List Innovest investment research has been used by: Collectively, these institutions have over $7 trillion in assets under management <ul><li>Not-For-Profit Organizations and Government </li></ul><ul><li>Environment Agency of Victoria (Aus) </li></ul><ul><li>Environment Canada </li></ul><ul><li>Greenpeace </li></ul><ul><li>Heinz Endowments </li></ul><ul><li>Natural Resources Canada </li></ul><ul><li>New Zealand Superannuation Fund </li></ul><ul><li>NWF – National Wildlife Federation </li></ul><ul><li>United Nations Environment Program </li></ul><ul><li>Unicef </li></ul><ul><li>UK Environment Agency </li></ul><ul><li>US Environmental Protection Agency </li></ul><ul><li>WWF – World Wide Fund for Nature </li></ul>